Revisiting the Political Economy of Fiscal Adjustments

Revisiting the political economy of fiscal adjustmentsThanasis Ziogasa,⇑, Theodore PanagiotidisbaDepartment of Economic Geography, University of Groningen, the NetherlandsbDepartment of Economics, University of Macedonia, Greecearticle infoArticle history:Available online 27 October 2020JEL:D72E62H62Keywords:Fiscal adjustmentsSpending cutsCabinets’ survivalHeteroskedasticity probitabstractThe political economy of fiscal adjustments is revisited within the framework of Alesinaet al. (1998). A panel that spans from 1970 to 2016 for three datasets (European Union,Eurozone and OECD-19) is constructed. Both descriptive statistics and regression analysisis employed. We assess how successful are policies for budget consolidation. Panel logitand heteroskedasticity probit evaluate the probability of government’s survival after hav-ing engaged in tight (loose) fiscal policies. Economic variables and political characteristicsof the cabinets are taken into account in the specifications. We reveal that the fiscal balanceis an insignificant predictor for the changes of the prime minister or the ideology of thecabinet. Inflation and unemployment rate are significant and positively related to changesin government while spending adjustment composition dummies are negative and signif-icant predictors for such changes. Revenue based adjustments have no effect on re-electionprospects. Our results are robust to sensitivity checks, including various sub-sample anal-ysis and non-linear specifications.